Kellogg World Alumni Magazine, Winter 2002Kellogg School of Management
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  Elizabeth Howard

Theory & Practice
Economists in utopia?

Practice: Elizabeth Howard,
Assistant Dean and Director of Development

Nonprofits seek a better way to earn: Competition has led nonprofits to embrace economic theory and act more like their for-profit cousins

Economics, even utopian economics, was not a subject that overly concerned many nonprofit managers about 10 or 15 years ago.

At that time, “doing good” was the important aspect of nonprofit work. Today, however, there is a stronger emphasis on “doing well while doing good” and the nonprofit sector pays greater attention to basic economic theory and business skills. This shift does not mean that nonprofits have abandoned their missions, ignored their clients and customers or sacrificed their commitment. It simply means that in a competitive external environment, nonprofits need to run their organizations more efficiently and effectively — be more “market driven,” as economic theory teaches.

To be efficient is a cornerstone of economic theory: Successful markets are efficient markets. Nonprofits need to be efficient. Resources are scarce and donors are demanding. Funders now ask and encourage nonprofits to collaborate to become more efficient and effectively serve the population in need. In his essay (facing page), Professor Julian Jamison illustrates this point with his reference to preventative health care. More hospitals may not be as efficient as more outreach, and collaboration will help nonprofits expand to reach a larger population, offering potentially life-saving services. Strategic alliances among nonprofits are on the rise as they strive to achieve their missions and make maximum use of the resources available.

Efficiency also means high return with some specific measurement of that return. Nonprofits are incorporated with a responsibility to society as a whole. Their “shareholders” are the funders, clients, members and the greater community. So the return on investment is different than that of a for-profit enterprise, but no less important. How we measure that return or performance demands metrics that are understandable and tangible. There is a movement among several community foundations in the Midwest to create new performance metrics for nonprofit organizations. This movement would ask nonprofits to quantify their goals and objectives so funders can see the actual impact of their grants.

Economics is also concerned with accountability. Increasing accountability of executives, accountants and board members is a topic much in the news today. Nonprofits are also concerned with accountability. Since the constituency of the nonprofit is society in general, nonprofit managers need to be accountable to more than simply 15 board members or 10,000 shareholders. Thus, the reporting nonprofits do today needs to be more transparent. Since 990 forms are available on the Internet, donors are requesting more information about where dollars are spent, and are more concerned about how institutions invest their gifts now and in the future. Professor Jamison’s research includes consideration of the reasons why donors are concerned about what happens after they die. The answers to this question certainly have important implications for nonprofits, since they rely on planned gifts and bequests to fulfill their missions. This concern means that the organization has to be accountable not only to the donor, but also to the family and the legacy the donor leaves behind. Funds must be invested for the long-term stability and success of the enterprise, not the short-term gain. This is a unique economic strategy that nonprofits must employ.

Economics is market-driven. Nonprofits explore new markets, analyze the costs and benefits of new directions and employ various financial analytical tools. The key difference is that although market response is important, mission is paramount. We want to do well, but we must continue to do good.

©2002 Kellogg School of Management, Northwestern University